VIX With An 8 Handle
The VIX seems to keep reaching unprecedented levels. I guess it’s fair to say this is expected because the short VIX trade has been very popular as traders feel it’s a way to mint free money. Personally, I think it’s better to sell some of your stocks instead of buying the VIX for protection. When you sell stocks, you get to choose which stock you think is the least undervalued. Buying the VIX is a lazy way of buying protection. One issue obviously is paying capital gains taxes, but you can take that into account when deciding what to sell. Selling a small portion of a position to avoid taking too much risk shouldn’t be that challenging.
The VIX finally hit a new all-time low today. As you can see in the chart below, it fell to 8.84. The yellow highlight represents the trading days in the last 3 months. The VIX has had 17 of the lowest 26 closes in the past 3 months. Obviously, the VIX doesn’t have that long of a history. I would be interested to see what the VIX would have traded at in the 1920s stock market rally. It may have made trading more extreme since many bears are claiming that when the short VIX trades unwind due to a rising VIX, there will be large losses which will encompass the entire market. With the short VIX trades the largest in history, it remains to be seen what the effects will be if volatility returns. I can’t say if that hypothesis is correct because we don’t have much precedent to go by. One thing I would like to point out is that many bears claimed that when there was a crash in the cryptocurrency arena there would be echoes in the normal markets. There were large losses earlier this month when Ethereum fell over 50%, yet there were no problems seen in the stock market or bond market.
My final take on the VIX is that I think it is accurate in its prediction that the next 30 days won’t have a lot of vacillations to the downside. Unless Amazon and Apple report disastrous quarters, there isn’t much uncertainty coming in the month of August. The top news story is whether the GOP passes healthcare reform and that hasn’t been moving the market.
